As the second quarter earnings season draws to a close, the overall takeaway is surprisingly positive, especially given the recent increase in volatility. Despite heightened turbulence, earnings are growing at their fastest pace since 2021. Investors were rattled in late July by a perfect storm of events—a sharp 8% decline in the S&P 500, driven by the Yen carry trade unwind, a disappointing jobs report, and fears of a hard landing. The unexpected deterioration in U.S. consumer health highlighted by companies like Visa and McDonald’s, intensified market concerns. Investors saw these reports as early indicators of weakness that might not yet be reflected in the lagging economic data. Yet, when we step back and examine the quarter as a whole, the picture is one of healthy growth, albeit in a dynamic environment where some companies are thriving, and others face headwinds. In other words, it’s a typical earnings season. Here are some of the key themes that emerged:
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Growth – Earnings growth for the second quarter is projected to reach nearly 11%, marking a significant acceleration and the fourth consecutive quarter of expansion. Sales growth is expected to eclipse 5%, indicating robust performance even as pricing power begins to wane. Looking ahead, analysts predict similar sales growth for the rest of the year, with a slight uptick expected in 2025. Earnings are also forecasted to accelerate, with a 15% growth rate anticipated in 2025. As fundamentals in sectors like healthcare and financials continue to improve, the market is becoming less dependent on the technology sector. This broader market participation, alongside the expected earnings acceleration, bodes well for the overall market outlook.
Consumer Weakness – Several consumer-facing companies have cut their guidance for the year, citing a slowing consumer, with weakness particularly evident in household goods and food & beverages. Amazon observed that customers are increasingly “looking for deals,” while Pepsi remarked that “the consumer is more cautious.” Although bargain hunting is expected as consumer balance sheets become stretched, it appears that lower-income consumers have significantly pulled back. McDonald’s reported, “we are seeing trade down, but the loss of the low-income consumer is greater than the trade-down benefit.” Citigroup echoed this sentiment, noting a “divergence in performance and behavior across FICO and income.”
However, not all companies are feeling the pinch. Citigroup still sees an “overall resilient U.S. consumer,” and Capital One noted that “the U.S. consumer remains a source of strength.” Despite McDonald’s challenges, Chipotle experienced growth across all income cohorts. This mixed picture suggests that while some companies are underperforming as consumers become more selective, others are thriving. The key takeaway is that consumers are hunting for deals, but they’re still spending, which sets the stage for continued growth.
Election Uncertainty – The uncertainty surrounding the upcoming election has prompted some companies to adopt a cautious, “wait and see” approach. AECOM captured this sentiment well, stating, “as governments change, there’s no doubt there’s a change in your priorities.” Generally, companies most likely to be impacted by a potential regime change are the ones delaying investments. For instance, renewable equipment manufacturer Array Technologies mentioned it’s “waiting to see what potential impacts the election may have on the longer-term renewable energy industry.” On the other hand, Bentley Systems expressed confidence in “bipartisan support for infrastructure” regardless of the election outcome.
The key takeaway is that this temporary pause is driven by a need for clarity rather than economic weakness. We expect these companies to resume investment in 2025, which could provide a significant boost to growth.
Although this earnings season coincided with a market pullback and for some, disappointing results, the overarching message is one of continued fundamental strength. Earnings are growing at their fastest pace in years, with further acceleration expected in the fourth quarter and into 2025. While volatility and uncertainty are elevated, business is gradually returning to normal, and the market appears ready to climb the proverbial wall of worry.
For more content by Jake Bleicher, Portfolio Manager click here.
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